How PLUS Loans For College Can Be Used To Close The Gap In College Funding

By: Donald Saunders

With the increasing cost of education over the past few years students relying on traditional Stafford loans have regularly found that they are no longer meeting most of their expenses. The PLUS program (Parent Loans for Undergraduate Students) was thus introduced and is designed to close the gap between the sum available from college loans and the cost of education.

Despite the fact that the interest rate is greater than other loans the ceiling on borrowing is considerably more flexible and PLUS loans are not restricted by being need-based.

In the case of the FFEL program (Federal Family Education Loan) in which private lenders fund the loan the interest rate is presently 8.5% and loans provided through the US Department of Education under the Direct loan program are presently charged at 7.9%. This difference of just 0.6% may seem insignificant but can prove to be substantial when viewed over the lifetime of the average loan.

With PLUS loans parents are permitted to borrow up to the total cost of a child's education minus any other financial aid amount that the child is receiving. Though PLUS money is not exactly cheap it can frequently make a difference when it comes to choosing which college to attend or indeed whether to attend at all.

However, since PLUS loans are not need-based, they do need a credit check for approval. Usually it is of course the parent's rather than the student's credit that is checked since the parent is signing the promissory note and will be responsible for repayment of the loan.

Where the credit history of the parent makes him or her ineligible for a PLUS loan a co-signer may come into play and a relative or other third party may guarantee the loan repayment and take on the legal responsibility as a co-borrower. With recent problems in the area of sub-prime borrowing however such cases are unfortunately less rare than they have been. That suggests that in borderline cases the need for a co-signer is becoming more likely.

Aside from interest rate changes another recent change to the program is the fact that it has been extended to allow professional and graduate students to qualify for PLUS loans. Identical interest rates and eligibility criteria apply and they need to be studying at an appropriate institution and on an eligible program.

Unlike many college loan programs, repayment of PLUS loans starts immediately and the first payment is typically required within 30 to 60 days after the loan monies are disbursed. Interest starts to build up from the time the first payment is drawn down and both interest and principal are paid in regular monthly installments while the student is in college. Payments are made to the private lender for FFEL loans and to a US Department of Education servicing center in the case of Direct loans.

It is important to work out the costs associated with obtaining a PLUS loan carefully and view it as a loan of last resort. Even something like a home equity loan could well be less expensive since the interest is tax-deductible.

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